Consumer spending is at all-time high

HONG KONG--Marketers expanding in Greater China can be forgiven for wondering where to locate their top executives moving to the region. As Hong Kong hits the tenth anniversary of its handover from British to Chinese rule on July 1, the city is feeling bullish, even cocky, partly because for the first time in a decade it isn’t facing a major crisis.

The city’s administration “seemed to want to make Hong Kong another Chinese city,” he added. “Hong Kong felt extremely threatened and thought it could be facing irrelevance, perhaps a gradual decline, against these rising cities. More recently however, Hong Kong has regained its self-confidence.”

Today, spending in retail outlets ranging from bargain shops to designer stores is strong, and property rents, a longtime indicator of Hong Kong's economic performance, are as high as they were before Asia sank into financial despair in mid-1997.

Two mainland rivalsBut that doesn’t mean that Hong Kong’s leaders can sit back and put their feet up as foreign investors pour into the city. Hong Kong’s retail and property prices have outpaced global increases and have made the city even more removed from the pulse of mainland China’s economic evolution.

The city faces two strong rivals in the mainland. Shanghai, long the country’s most cosmopolitan city, is already the Chinese headquarters for major multinational consumer products marketers like Unilever, Coca-Cola Co., PepsiCo, Nike, Adidas, Visa, McDonald’s Corp. and Starbucks.

Beijing, the Chinese capital, was considered drab a decade ago, but now is gaining a reputation among expatriates as an artistic center through areas like 798, a district of renovated factory spaces converted into residential lofts and cafes.

Beijing also has impressive cultural attractions like nearby sections of China’s Great Wall that are mostly lacking in Shanghai, a relatively young city founded by foreigners in the 19th century as a trading outpost. It is particularly popular with marketers in industries that rely on relationships with the Chinese government such as automotive and telecommunications, including Volkswagen, Motorola and Nokia.

In addition, Hong Kong is frequently compared to Singapore, a Southeast Asian island nation that is gaining greater appeal among expatriates as its loosens up tight controls over its citizens to encourage foreign investment. While it once punished jaywalkers and forbade chewing gum and Cosmopolitan magazine, today a lighter, looser Singapore even allows miniskirt-clad bar patrons to dance on the tables.

Pollution harming Hong Kong's competitivenessGiven the competition, Hong Kong’s positive attitude sometimes seems premature and the city clearly has its head in the sand about some serious issues, namely pollution, a major problem that its government barely acknowledges, and urban planning.

The American Chamber of Commerce released a position paper last year, warning the government that deteriorating air quality in Hong Kong will drive away potential
investors and threaten the city's competitiveness as Asia's free
trade center.

“It’s easy to assume that the big dark clouds over Hong Kong are coming from [Chinese factories near] the Pearl River than the power station on [Hong Kong’s] Lamma Island,” said Guy Abrahams, Hong Kong-based regional communications planning director for ZenithOptimedia.

And instead of developing its famous harbor into a pedestrian zone with outdoor restaurants like Singapore’s Clarke Quay zone, for example, it tore down the historic Star Ferry pier in Central last year to make way for a major highway, despite public pleas to preserve what’s left of Hong Kong’s colonial heritage.

At the same time, Hong Kong is under the watchful eye of the mainland’s powerful Communist party, who lead the People’s Republic of China (PRC). Certainly they don’t want Hong Kong to sink. The wealthy city is a golden egg retrieved from the hands of British rulers who snagged it after China’s defeat during the Opium Wars in the mid-1800s.

But party leaders in Beijing have bigger priorities, like managing China’s rapid economic growth, including a worrisome increase in the gap between rich and poor citizens, finding enough energy resources to keep China’s factories moving at full-speed, and ensuring the Olympic Games next year will be glitch-free since the entire world will be watching.

Mainlanders drive retail growthLike a poor relation who is invited to holiday meals, but nicely asked to sit at the end of the table, Hong Kong has mostly been left to fend for itself and manage its own affairs. On the tenth anniversary of Hong Kong’s transfer to Chinese rule, the territory--now called a Special Administrative Region--has surpassed many pre-handover fears and expectations.

Instead of PRC soldiers blanketing the city and banishing Hong Kong’s good-time capitalist attitude, the territory’s local economy is thriving and its shops are full of mainland tourists. They arrive by the busload and usually clean out even the priciest luxury goods shops like Louis Vuitton in a matter of minutes.

With its population lulled by high employment, low tax rates compared to the mainland, and cash registers stuffed with Chinese renminbi notes, which are now widely accepted at Hong Kong’s stores, hotels and restaurants, looming questions remain unanswered by Hong Kong’s leaders: Is Hong Kong an international city located on the edge of the world’s fastest growing economy, or is it a Chinese city whose fortunes depend on the spending power of rich mainland tourists?

As Beijing and Shanghai become more sophisticated and easy to maneuver, as their residents become more adept at speaking foreign languages, as they put in place infrastructure like efficient public transportation and telecommunications services that match Hong Kong, will the territory continue to prosper? And how much are marketers benefitting from Hong Kong’s recent success?

Ad budgets aren't growing with economy“Hong Kong’s economy is doing well, because mainlanders are investing in its stock market and there is strong spending in its luxury shops. When it comes to ad budgets and media spending, a good economy, strong stock market and high consumer spending would ordinarily lead to high ad spending. But that’s not happening,” warned Mr. Abrahams.

Overseas forces are “pushing up the economy” rather than local spending by permanent residents of Hong Kong, he added. “The profit being made in this boom in very recent times is being exported out of the country back to China so the advertising market is quite flat. The people who are spending and benefiting from the boom aren’t the domestic audience. So, things are looking great for Hong Kong, but it’s not translating into a very strong advertising market.”

Adspend in Hong Kong is “quite stable and no big increase is expected,” agreed Viveca Chan, founder of WE Worldwide Partners in Hong Kong. “That’s why [Hong Kong’s primary broadcaster] TVB is aggressively looking at revenue opportunities in China and plans to set up a Shanghai office.

The “good thing” is Hong Kong is back to reality with more realistic expectations. “We no longer see the big spend productions in the boom days of Hong Kong. Clients are more value for money conscious. ”

Agencies expand Chinese officesIn the meantime, China is stepping up its appeal for international marketers. Through its entry into the World Trade Organization, its government is beginning to take seriously once-ignored issues like corruption and intellectual property rights. It is opening up the economy to a greater range of businesses including financial and banking services, and other industries such as advertising agencies.

In November 2006, for example, London-based agency micro-network Bartle Bogle Hegarty became the first foreign firm to gain state permission to operate a wholly-owned ad agency in China. Its office in Shanghai remains its only operation in Greater China, including Hong Kong. Other foreign agencies such as Wieden + Kennedy and digital shop AKQA have also bypassed Hong Kong to open offices in mainland China. And George Gallate, Euro RSCG’s CEO for Asia/Pacific and the Middle East, chose Shanghai as his regional base rather than Hong Kong or even Singapore.

“In the last 10 years, there has been a massive move of advertising business and people to China. The [size of] 4A agencies has declined from 5,000 employees to 2,500. Why? Because 10 years ago, we all had departments called ‘China’ and now we all have Beijing, Shanghai and Guangzhou offices. Hong Kong has moved from being a regional, or at least Greater China hub, to a regional headquarters,” explained Mr. Thubron.

Logistical ease is usually cited as the best reason to set up a Greater China headquarters in the mainland, or place senior executives on the ground in China. As advertisers begin to penetrate second and third tier markets, as China’s smaller cities are called, it becomes more difficult to operate out of Hong Kong. The subtleties of these cities, such as consumer spending habits and brand preferences, are hard to gauge even from Shanghai or Beijing.

School places difficult for new arrivalsBut Hong Kong still has numerous advantages over its rivals across the border. As bad as its air and water pollution is, mainland Chinese cities normally are far worse. The territory has mostly wiped out corruption, has a transparent legal system and protects intellectual property rights. Despite accusations of self-censorship, its media environment is free enough that Turner Broadcasting continues to operate CNN International’s Asia/Pacific headquarters out of Hong Kong.

“China’s media scene is so complicated. Geographically, it’s nice to bunch things together, so you have China’s media scene as one area but Taiwan and Hong Kong are separate because they have more in common with the rest of the region,” said Mr. Abrahams.

Hong Kong also has one of the most sophisticated and modern public transportation systems in the world, including its modern airport, which makes it an ideal transportation hub.

One of the biggest challenges for multinationals operating in Hong Kong isn’t finding good staff or paying exorbitant compensation packages. It’s helping new arrivals find a spot for their children in Hong Kong’s international schools. The reason dates back to the SARS epidemic, which prompted thousands of expatriates to pack up and return home, or at least put more distance between their families and the epidemic’s origin in Guangdong province.

Suddenly left with empty classrooms, Hong Kong’s international schools successfully recruited new students among the local Chinese population to fill seats.

Now foreigners are returning to Hong Kong, “but they are finding there is no room at the inn,” said Mr. Abrahams. “Getting a job in Hong Kong is easy, but getting a school place is impossible. So it’s tricky moving people into Hong Kong.”

Not just another Chinese city“I don’t get the feeling that Hong Kong is just another Chinese city now,” said Mr. Abrahams. “Before you come to Hong Kong, you think of it as being international but when you get here, you see it’s a very Chinese place. But when you go to somewhere on the mainland, even Shanghai, you think of Hong Kong as being an international city again.

“Anyone can turn up in Hong Kong and feel comfortable and safe, and that’s probably the measure of whether you’re an international city, the ability to walk into a place and not have fear.”

Longtime residents of Hong Kong, including those who spend substantial time traveling to the mainland, also insist that Hong Kong remains an important gateway to the mainland.

The territory is “such a resilient place,” said Charles Brian-Boys at Eight Partnership, a Hong Kong-based marketing consultancy and custom publisher that also operates in the mainland.

Hong Kong “has been profoundly impacted by the global shift in communications towards online media and channel diffusion. That’s not just Hong Kong or post-handover, but the city is in the cutting edge of what’s happening. The city has never been in better shape. It feels like the eighties again.”